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Shelter from the sub-prime storm

Kevin Paterson takes a weekly look at the latest developments in the market and brings you what’s hot and what’s not in the world of mortgages

It is often said that the UK follows the US in financial trends as our economies are so inextricably linked. If that is the case, let’s hope that the latest scandal to hit the US lending market does not cross the Atlantic.

As Mortgage Strategy explained in its forward feature on February 12, the US sub-prime market has been turbulent of late. In the past couple of weeks storm clouds have been gathering over one of its largest sub-prime lenders and packagers.

New Century Financial Corporation recently closed its doors to new business following an announcement that it was no longer originating loans of 100% LTV or secured second charges.

New Century issued a statement saying that its filed accounts could not be relied upon, prompting an investigation by the Securities and Exchange Commission.

In the US, sub-prime lending accounts for more than 20% of total volume and is estimated to be worth $600bn (309bn) a year. As in Blighty, the US housing market has experienced a period of unprecedented growth, with returns from property growth annually topping 10%.

But in recent months the market has flatlined and in some states declined. The resale and new-build markets have struggled, with fewer people moving or buying homes. A driver of this has been interest rate rises to levels not seen for a decade or more. All of this has led to some of the highest repossession levels ever seen in the US. And this is a phenomenon that shows no sign of abating.

New Century’s problems could be repeated here if the specialist lending community is not more careful about its loosening lending criteria. When markets are rising lenders can take the hit on repossessions because it’s not difficult to move properties on quickly.

New Century caught a cold by exposing itself to ever greater risk by loosening its criteria without keeping a check on its business book’s quality or consistency.

As a result the firm’s balance sheet lending quality plummeted, which led to the plug being pulled on its funding. There is speculation that the firm will file for bankruptcy protection, which will send shock waves across the US specialist lending market. This, together with a plunge of more than 60% in New Century’s share price,

means that investors are bailing out in droves. And there’s no soft landing in sight.

But what has this got to do with us? As you all know, there has recently been a huge increase in competition at this end of the market, which has led to more and more lenders pushing the envelope when it comes to risky lending. If we’re not careful we are doomed to repeat the US’ mistakes.

Many of the UK’s new specialist lenders would do well to study what is going on across the Atlantic right now and take steps to avoid repeating the same errors.

Pressure from both ends could see the buy-to-let sector go pop

We are in a period of reasonably flat growth in the housing market so there’s been a fair bit of comment concerning likely defaults in the buy-to-let sector. Rental income has levelled off and interest rates are at their highest for many years.

So what do we see from a selection of so-called responsible lenders? More 90% LTV offerings, that’s what.

We know the arguments spouted by the Council of Mortgage Lenders – namely, that this is a stable sector with lower repossessions than the prime sector and that these offerings do not compromise the offerings of responsible lenders. But then we all know where the CML’s loyalties lie.

This will simply serve to encourage greater risk-taking by landlords, stripping out more equity from their properties

and increasing their gearing. It leaves little margin for error if everything goes pear-shaped.

We have already seen rental income assessments lowered as more lenders try to muscle in on the market-place. But unfortunately if you apply pressure at both ends, the middle invariably goes pop.

Let specialist battle commence

What is supposedly the specialist lending sector’s first multi-lender cascade sourcing system has come to market.

It entered the fray not with a bang but with a whimper recently, under the unimaginative and misleading brand name Lendersonline. Like anything that is first to market, I have no doubt that it will be copied and improved upon in the coming months.

Interestingly, the concept was discussed at the Mortgage Strategy Packager Summit in January but a complete outsider has been the first to deliver it.

Integrating an Equifax credit search, the system sources “intelligently” we are told, taking into account clients’ credit histories when sourcing lenders that fit their criteria. This is the specialist sector’s future battleground. Now the lines have been drawn, let battle commence.


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